investment case gategroup & ekornes vis italy 2011
DESCRIPTION
2 stock ideas presented at Value Seminar Italy Summer 2011TRANSCRIPT
SOLID CASH FLOWS STRESS LESS -TWO OF OUR HOLDINGS
8th Value Investing SeminarTrani, Italy, July 2011
Don Fitzgerald, CFA Sebastien [email protected] [email protected]
« ROBUST CASHFLOW DESPITE TURBULENCE »
Listed: Zurich Market Cap: CHF 950mISIN: CH0100185955Free Float: 100% - Daily Volume – CHF 3m
Airline Catering and Related Services
GATEGROUP IS...AIRLINE CATERING
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GATEGROUP IS...PROVISIONING & LOGISTICS
…
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GATEGROUP IS...AIRPORT HOSPITALITY & ON-BOARD RETAIL
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GATEGROUP – WHERE THEY MAKE MONEY
RevenueRevenue by Region2010
Revenue by Activity2010
Europe 54%North America 27%
Other
20%
6Source: Company data
Other 6%
Asia-Pacific 13%
Catering & Provisioning
80 %%
GATEGROUP – WHAT IS THE BUSINESS?
� Industry Leader
� Locations - global Hubs & regional airports
� Manages Complexity - 10k flights daily
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� Manages Complexity - 10k flights daily
� Costs - Raw Materials + Staff
� Economics - Ca. 5% EBIT Margin, 15% ROIC
Source: Company data & Tocqueville estimates
GATEGROUP – THE AIRLINE CONTRACTS
� 3 to 7 years: � Visibility - 90% 2010 sales - contracts valid
through 2012� 75% Renewal rate
� Fee Structure � Fixed Cost Recovery
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� Fixed Cost Recovery� Handling per Plane � Consumption per Passenger
� Minimum Contract Revenues Cover Fixed Costs
� Cost-plus – materials & labour
Source: Company data & Tocqueville estimates
� Location at Hubs
� Local Economies of Scale at Hubs
� Client Switching Costs
GATEGROUP – DOES IT HAVE A MOAT?
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� Reputation
� Global Network
Example – Swissair (Lufthansa Group) recently preferred to renew hub contractwith Gategroup at Zurich rather than switch to itssister company Lufthansa Skychefs.
Global Passenger Volumes - Gravitational Growth Pull
GATEGROUP – IN GROWTH OR DECLINE?
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Source: Gategroup, ICAO (International Civil Aviation Organization), IATA, World Bank, IMF
Note: 2010-2012 based on management and IATA estimates
GATEGROUP – GROWTH HEADWINDS
� De-contenting
� Low Cost Model
HEADWIND MITIGANT
� Largely played out
� On Board Retail Solutions
� Adjacent sectors – e.g. trains
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� Geographic Footprint
� Cross-sell non-catering lines
� Selective Acquisitions
GATEGROUP – END OF DE-CONTENTING?
$3,00
$3,50
$4,00
$4,50
$ / pax FOOD SPEND PER PASSENGER BY US AIRLINES
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Source: U.S. Department of Transportation (US DOT), UBS Research
$1,50
$2,00
$2,50
$3,00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GATEGROUP – A GOOD BUSINESS?
� Has Moat
� Contracts Assure Visibility
� Should Grow
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� Flexible Cost Structure
� Decent Returns on Capital
GATEGROUP – A GOOD BUSINESS?
BUT...
� Clients are Airlines
� Concentrated Client Base�Top 5 – ca. 45% of sales
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Top 5 – ca. 45% of sales
� Volatility - Event Risk & Cycle
GATEGROUP – WHAT CAN GO WRONG?
� Contract Loss / Client Failure
� Waste the CHF 500m War-Chest
� Economic Environment
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� Economic Environment� Oil price� Load factors
� Labour Dispute
� Event Risk
� Airlines Invest in Capacity & Service
� Value-creative M+A
� Pays Dividend
GATEGROUP – WHAT CAN GO RIGHT?
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� Pays Dividend
GATEGROUP MEETS……MR. MARKET
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45
50
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CLOUD ASH
EXIT
Company unknown
Motivated Sellers
No Listed Peers
Broker coverage
Extensive Investor Relations
Raises CHF 240m at 43 CHF
Japan tragedy
Oil at $ 115
Fraud
CEO resigns
CHF
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10
15
20
25
30
35
May-09 August-09 November-09 February-10 May-10 August-10 November-10 February-11 May-11
BUILD POSITION
BUY
EXIT
BUY
Source: Bloomberg
GATEGROUP – STILL UNDER-EARNING
CHF m 2009A 2010A 2011E
Sales 2712 2700 2800
EBITDA 189 217 225
EBITDA Margin 7,0% 8,0% 8,0%
Adjusted EBIT 123 157 163
Capex -58 -47 -45
Underlying growth to
continue despite CHF
translation effect
Effects of:
Recession, volcano ash
, fraud, japan quake…..
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� Reported EBIT understates earnings power due to:
� Ca. 25m p.a. Share-based payments in 09 / 10 (since vested)
� Ca. 15m p.a. Amortization of customer relationships
� Modest operating working capital requirements
� Low cash Tax rate - Swiss HQ; CHF 600m tax loss carry-forwards
� Maintenance Capex 1,5% of sales
Source: Company data & Tocqueville estimates
Capex -58 -47 -45
less taxes -21 -15 -15
FCF to Firm 110 155 165
Normative margins – ca 9%
GATEGROUP – MR. MARKET’S PRICE
60% EUR, 40% USD
Market Cap 985
Cash -460
Debt 570
Pension Liabilities 40
Minorities 24
Assume no cash
generation in seasonally
weak H1.
Cash balance largely CHF
19Source: Company data & Tocqueville estimates
Minorities 24
Estimate EV per June 30 1159
Share Price June 30 (CHF) 37
Shares Outstanding (m) 27
985
Note : Mid Year is seasonal weak-point in cash generation
GATEGROUP – IS IT CHEAP?
2009 2010 2011E
FCF Yield to Firm 9% 13% 14%
Current EV / EBITDA 6,1 5,3 5,2
Current EV / Adjusted EBIT 9,4 7,4 7,1
20Source: Company data & Tocqueville estimates
GATEGROUP – WHY WE OWN IT?
� Reasonable Business
� Cash Generator
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� Cash Generator
� Still Under-Earning
� Modest Valuation
Commercial Break – Tocqueville Value Europe
� Don Fitzgerald
� Sébastien Lemonnier
Citywire – Category European Equities
Europerformance
Ranked 5th/114 in category since inception (from 31/03/00 to 30/06/2011)
« A stress less stock »
Home furnishing manufacturer - Norway
€ 565m market cap (30/06/11 - €/NOK 7.78)
Isin: NO0003035305
Free float 82% - Daily liquidity €300k
EKORNES
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EKORNES
1971……………………………………..1981…………….
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1971……………………………………..1981…………….
1991……………………………….2001……………………………………..2011
EKORNES
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EKORNES
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EKORNES – BUSINESS BREAKDOWN
Revenue by activity 2010 Revenue by region 2010
NordicStressless chairs
9%
4%
19%21%
8%
28Source: Company data
Nordic
Europe
US-Canada
ROW
Stressless chairs
Sofa
Mattresses
Foam, tables, etc…
28% 59%
53%
19%
EKORNES – WHAT IS THE BUSINESS?
� Ergonomic furniture
� Stressless brand
� All production in Norway
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� All production in Norway
� 2,500 partner outlets
� €230k sales per employee
Source: Company data
EKORNES – OVER LAST 10 YEARS
� Av. annual turnover growth > 5%
� 19.2% av. EBIT margin
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� Net profit margin > 12%
� Annual ROCE > 25%
Source: Company data
�
�
EKORNES - Does it have a moat?
Niche focus
Efficient production
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�
�
Loyal partners
Strong corporate culture
Loyal partners
Strong corporate culture
� Niche focus: ergonomic design
� Patented innovation: comfort focus
� Brand building
EKORNES - Does it have a moat?
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++
�
EKORNES - DOES IT HAVE A MOAT?
� Efficient production:
Automated production
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�
�
Automated production
In-house components
� Most profitable per sqm
EKORNES - DOES IT HAVE A MOAT?
� Loyal partners:
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� Most profitable per sqm
� Exclusivity / Most effective display
� Commitment to share marketing costs
� Disciplined management
EKORNES - DOES IT HAVE A MOAT?
� Strong corporate culture:
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� High staff loyalty
� Bonus scheme (> 1 month salary)
EKORNES – GROWTH OR JUST CYCLICAL?
� Grow distribution network
� 50 net new stores / annum
� Grow product portfolio
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� Expand Stressless business
� Grow in emerging countries
� Strict criteria
EKORNES – A COMFORTABLE BUSINESS ?
� Industry winner
� Hard to duplicate
� Proven growth
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� Proven growth
� Good returns on capital
� Disciplined management
EKORNES – FINANCIALS
Below management targets
NOK - millions 2000-2010 av. 2007 2008 2009 2010 2011e 2012e
Sales 2574 2673 2588 2869 2969 3103
growth % 6,5% 9,4% 3,9% -3,2% 10,9% 3,5% 4,5%
Material cost 647 676 620 663
Gross profit % 75% 75% 76% 77%
Salaries 701 677 686 775
Others 665 751 673 780
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NOPAT: EBIT – (1 -Tax rate)
Operating CF: NOPAT + Depreciation
FCF (after tax): Op. CF – Capex
Source: Company data & Tocqueville estimates
Others 665 751 673 780
Depreciation 96 106 110 116
EBIT 465 463 500 534 543 590
% 19,2% 18,1% 17,3% 19,3% 18,6% 18,3% 19,0%
NOPAT 326 324 350 374 380 413
Capex 191 191 103 117 120 120
FCF 231 239 356 373 380 413
ROCE - after tax 27,9% 29,1% 31,3% 28,4% 27,3% 26,8% 28,0%
EKORNES – IS IT CHEAP?
Stock price @ NOK 122 (as of June 30th, 2011)
Valuation multiples
2010 2011e 2012e
EV/EBIT 7,7 7,6 7,0
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Top line: 3.5-4.5% / year – below management aim
2011 EBIT @ 18.3% - raw mat. + MKT temporary increase
2012 EBIT @ 19% - below historical av.
Capex @ NOK 120m (management guidance)
Net cash, post dividend payment
Source: Company data & Tocqueville estimates
EV/EBIT 7,7 7,6 7,0
FCF yield % 9,1% 9,2% 10,0%
Div yield 5,7% 6,6% 7,4%
EKORNES – IS IT CHEAP?
8.9x hist. EV/EBIT 10x EV/EBIT
Sales av 2010-12 2980Sales av 2010-12 2980
Stock price @ NOK 122 (as of June 30th, 2011)
40Source: Company data & Tocqueville estimates
Sales av 2010-12 2980
EBIT % 19,2%
Entreprise Value 5722
Market cap. 6267
Implied stock price 170
Sales av 2010-12 2980
EBIT % 19,2%
Entreprise Value 5093
Market cap. 5638
Implied stock price 153
Q&AQ&A
WHY WE OWN EKORNES?
� Unique business model
� Industry gainer
� Robust cash generator
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� Robust cash generator
� Attractive dividend yield
� Good risk / reward – Margin of safety
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• The information/analyses contained in this document, particularly figures, have come partly from external sources
considered to be trustworthy. However, Tocqueville Finance SA cannot guarantee that the information/analyses are
complete, accurate and up-to-date.
• Tocqueville Finance S.A. draws investors’ attention to the fact that past performances are presented on the basis of
figures relating to previous years and are not an indication of future performance.
Disclaimer
• Moreover, Tocqueville Finance S.A. in no way guarantees the current or future performances of funds cited in this
document
• Investors are reminded that any financial investment includes risks (market risks, capital risk, foreign exchange risk) that
may result in financial losses. Therefore, Tocqueville Finance S.A. recommends that prior to any investment, the recipient
of this document carefully reads the prospectuses of the cited funds which are available free of charge at its head office
located 8 rue Lamennais, Paris 75008 or on its website www.tocquevillefinance.fr and ensures that they have the
experience and knowledge needed to make an investment decision, particularly with regard to the legal and tax
implications.
TRANI un GRAN POSTO, un GRANDE EVENTO
GRAZIE CICCIO & TEAM
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